In short, the former is much more likely. The decline seems to have only begun.
Let’s take a look at the charts for details, starting with the big picture. On Monday we wrote the following about gold’s long-term charts:
Zeroing in on Gold
It is rare when gold rallies on extremely huge volume during the week and it is extremely rare when this happens after weeks during which the volume was relatively low. The relativity requirement is more important than it appears at the first sight. The futures market grows in general and the volume increases – this is the case in most futures markets, not only in case of gold futures that the above chart represents. So, by looking at absolute volume levels only, we would not know if what we see is really an anomaly or a normal consequence of the above-mentioned trend. This process is rather gradual, so if we see rapid increases in volume, not slow ones, it suggests that something extraordinary has happened. That’s what makes volume spikes so important.
The volume spikes represent different situations when we see them during gold’s declines and when we see them during gold’s rallies. It’s rather obvious why it’s best to compare apples to apples, so it’s no surprise that in order to check what happened in cases that are similar to the current ones, it’s best to focus on the huge-volume weekly rallies.
We marked these similar cases with red vertical lines. There were four cases that were very similar when looking at gold from the broad perspective. There was one more in the more recent past that is clearer once we zoom in. The four above-mentioned cases are:
- the late 2008 top that was almost immediately followed by a huge decline
- the late 2009 top that was followed by a notable decline that took a few months
- the 2011 top – no comment is necessary here
- the mid-2017 top – one of the most important tops of the recent years that was followed by several-month-long decline
Since all similar cases point to the same outcome, the implications are obvious. History tends to rhyme, so gold is likely to slide in the following months, not to mention weeks.
Speaking of weekly declines, let’s zoom in a bit, and quote what we previously wrote about the chart below:
Gold is approaching its long-term resistance created by the previous highs. There is one very interesting rule regarding this resistance. No matter how volatile or promising the rally above the red resistance line was, it was always (in the last couple of years) invalidated in the following week. Given today’s pre-market rally in gold, it seems that we might see a weekly close above it. This means that the next week would quite likely include the invalidation of the current breakout and the beginning of another slide lower.